Once you have built your emergency fund of $1000 (or the equivalent in yourn own currency) for unexpected or emergency expenses, you are going to continue with the new savings goal in line with our mission to reaching financial independence. In this step we look at the ins and outs of a 3 months living fund and you are going to start working towards putting together this fund.
The rationale behind a 3 months living fund is that it would cover your basic living expenses if for whatever reason you no longer receive an income. This might be because you lose your job, are unable to work or voluntarily decide to take time out of work, for example to care for an elderly parent or sick relative or because you want to take time to focus on something else. It a safety net that ties you over for at least three months that will at least cover your basic living expenses for some months, leaving you time to find a new job, an alternative income or just allowing you to take those three months off before returning back to work.
A three months fund is a good minimum that will give you enough of a cushion to deal with a loss of income in the short-term, although it might be wise to consider building up a fund for 6 months at a later stage in the future. Of course if you manage to build up a 6 month fund this gives you more security than “just” 3 months, but 6 months will probably take you quite a while to get to, so I would suggest to work towards 3 months first, then get the rest of your savings and finances sorted, before starting to pay in more for a 6 months safety net.
Step 27 – build a 3 months living fund – in detail:
- First things first: this 3 months living fund will be accumulated in the new savings account that you opened in step 26: open a new savings account. (Did I not mention it would come in handy soon?)
- I recommend you don’t start building this fund until you have saved together the emergency fund first. There isn’t much point dividing your money over two “safety net” funds at this stage, so best to first build your emergency fund and get that one out of the way, before moving on to building a 3 months living fund.
- Start with looking at your expenses again as you did before. Is there any money you can set aside to allocate to this fund on a regular basis? How are you doing with the cut-down-1-expense-challenge? If you are using any extra money to pay off debts, consider whether you’d like to take a part of that money to build this fund, so that even if you need to tap into this before you have paid off all of your debt, this is still possible?
- As before, don’t worry if your current contributions are low, even if it is just $10, all small things make a difference over the long-term. And once you start, you’ll find ways to add more every time.
- Set yourself a goal of how much you want to get in this fund. There are different targets you could set yourself:
- Save exactly 3 months of your current salary or income;
- Save only 3 months of essential expenses (i.e. all of the expenses that you couldn’t or wouldn’t want to give up, but none of the extra ones. The extra ones could be discretionary expenses, extra savings contributions or investments etc.)
- Save 3 months of both your own and your partner’s expenses or income, in case both of you happen to lose your income source at the same time.
- Work towards 3 months for now, but keep in mind that if you can get to 6 months (with time) this provides even more security.
This step will likely take you a little longer to complete, so don’t worry if it is a little slow going at first, with time you’ll get there and since you are putting the money in a savings account, even the (small) interest you receive on it, will help you little by little to reach your target. That said, it is also nice and motivating to sometimes make bigger contributions and to see things moving a little faster than just $10 a month, so in the next few steps, we’ll look at some tips to make sure to keep your momentum of fund building up.
Read more about my 100 steps mission to financial independence or simply decide to take control today and join us on our step-by-step quest on how to make your finances work for you, starting with step 1.